Let’s look at a taxpayer win on an issue not known for taxpayer wins.
Thomas Hamilton was an attorney and Edith Hamilton was a chaplain. They filed a 2016 tax return showing tax due of almost $72 thousand. They however did not pay the tax in full.
The IRS assessed.
The IRS then issued a Notice of Federal Tax Lien (NFTL) to secure its assessment.
This presented a procedural option: the Hamiltons could request a Collection Due Process (CDP) hearing. If they could work-out a payment agreement perhaps they might avoid the lien. Liens can be embarrassing.
They requested a CDP hearing.
The IRS Settlement Officer (SO) asked for a lot of information, including:
(1) Proof of 2018 estimated tax payments
(2) Their 2017 personal tax return
(3) Six months of bank statements
(4) Three months of pay stubs
(5) Proof of various expenses for the preceding three months
The SO also wanted the law practice to catch-up on its (mostly payroll-related) tax returns from 2015 through 2017.
The SO did stagger some of the due dates for the above: some were due on October 17, others were due October 24. The hearing itself was November 15, 2018.
The Hamiltons did not provide any documents by October 24.
They did write a letter on October 31, explaining that their (now) previous bookkeeper failed to keep many documents, a fact which came to light as they were trying to comply with the SO’s request. They hired a CPA, who was helping reconstruct records as well as representing them during the CDP hearing. Finally, they had reordered online bank statements and would forward the requested documentation as soon as possible. They reiterated their desire for a payment plan.
Let me retract the “oh oh” comment, although they should have responded – in some manner - by the October 17 date.
Why? To discourage the SO from thinking that they were stalling.
Between November 2 and November 15, the Hamiltons sent five faxes totaling hundreds of pages. They sent bank statements, copies of bills and some (but not all) of the payroll tax returns for the law practice.
The day before the hearing they also faxed personal and business financial information (Forms 433-A and 433-B) as well as a copy of their 2017 individual tax return and its electronic acceptance by the IRS.
The SO had spent no time on the case from October 1 to the date of the hearing, when she spent an hour preparing beforehand.
At the hearing the SO pressed on the following:
· They had not filed their 2017 individual tax return.
· They had not provided proof of their expenses.
· They were not making 2018 estimated tax payments.
· They had not filed payroll returns for the law practice.
The CPA chimed in:
· They had filed their 2017 tax return and provided proof of electronic acceptance by the IRS.
· They had provided bank statements and documentation for the vast majority of their expenses.
· They would be current with their 2018 estimated taxes as soon as the following month.
· They had file some of the payroll returns the SO was considering unfiled.
The SO said she would recommend filing the NFTL.
Mr Hamilton requested additional time to provide the missing information.
The SO said: no chance.
The IRS sustained the filing of the NFTL for 2016 and also rejected their request for an installment agreement.
Sheesshh. That CDP hearing blew up.
And so we get to Tax Court.
Let’s set up the issue:
· There was a proposed lien
· To which taxpayers requested a CDP hearing
· And got turned down for not complying with the SO’s documentation requests
You can take one of these to Tax Court, but it is very tough to win. In short, you must show that the IRS was capricious and abused its discretion.
The Court went through the file:
1. The Hamiltons sent an 11-page fax on November 9. The fax included one of the payroll tax returns the SO considered missing.
The SO had included the fax cover sheet in her record.
2. They had filed their 2017 individual tax return and had faxed the SO a copy. They had also informed her of this filing at the hearing.
But the SO had included the non-filing as a reason for her bounce.
3. Between November 2 and the November 15 hearing date, they had sent at least five faxes, totaling hundreds of pages of financial documentation
But the SO said they had not provided documentation.
Here is the Court:
The failure of the administrative record to capture some documents makes us question the completeness of the administrative record that the settlement officer considered and that we are reviewing.
And here the case turned.
The third strike.
The Court pointed out that the Hamiltons made efforts to keep the SO apprised – of the bookkeeper debacle, of the request for copies of documents and bank statements. They asked the SO to apprise them of any questions or issues while they could still react.
Then the Court emphasized that the SO had not even looked at the file until the day of the hearing.
The hearing where she nonetheless chastised the Hamiltons for not having provided all the paperwork.
Here is the Court:
She did not take them up on that offer; her doing so would have allowed the Hamiltons to address any issues before the November 15, 2018 hearing.”
The Court continued:
… the settlement officer made up her mind after a cursory one-hour review of the Hamiltons’ materials and failed to give proper consideration to the issues they raised …”
The cumulative effect of the settlement officer’s conduct in this case was to deprive the Hamiltons of fair consideration of their issues and concerns. The Hamilton’s conduct was by no means perfect, but it reflected consistent cooperation and good-faith effort throughout the CDP process.”
The SO’s decision was found arbitrary and lacking sound basis in fact or law.
The case was returned to IRS Appeals for another hearing.
The SO had gotten the case off her desk.
But she had not done her job.
And there you have a rare taxpayer win in the CDP arena.
Our case this time was Hamilton v Commissioner, T.C. Memo 2022-21.